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Ross5eChap25sm

# Ross5eChap25sm - Chapter 25 Warrants and Convertibles 25.2...

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Answers to End–of–Chapter Problems B–373 Chapter 25: Warrants and Convertibles 25.2 When a warrant is issued by the company, and when a warrant is exercised, the number of shares increases. A call option is a contract between investors and does not affect the number of shares of the firm. 25.4 a. Since the stock price is currently below the exercise price of the warrant, the lower bound on the price of the warrant is zero. If there is only a small probability that the firm’s stock price will rise above the exercise price of the warrant, the warrant has little value. An upper bound on the price of the warrant is \$33, the current price of the common stock. One would never pay more than \$33 to receive the right to purchase a share of the company’s stock if the firm’s stock were only worth \$33. b. If the stock is trading for \$39 per share, the lower bound on the price of the warrant is \$4, the difference between the current stock price and the warrant’s exercise price. If warrants were selling for less than this amount, an investor could earn an arbitrage profit by purchasing warrants, exercising them immediately, and selling the stock. As always, the upper bound on the price of a warrant is the current stock price. In this case, one would never pay more than \$39 for the right to buy a single share of stock when he could purchase a share outright for \$39. 25.6 The value of the company’s assets is the combined value of the stock and the warrants. So, the value of the company’s assets before the warrants are exercised is: Company value = 11,000,000(\$16.96) + 1,100,000(\$3.05) Company value = \$189,915,000 When the warrants are exercised, the value of the company will increase by the number of warrants times the exercise price, or: Value increase = 1,100,000(\$15.5)

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Ross5eChap25sm - Chapter 25 Warrants and Convertibles 25.2...

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